The Standard centres on operational risk as a quantifiable capital requirement, and sets out discrete elements used to measure exposure and translate it into a capital amount. Key concepts and their operational definitions in the text are:

• Operational Risk Charge: the minimum capital required against losses from inadequate or failed internal processes, people and systems or external events (Operational Risk Charge, paras 5-6). The Standard treats this charge as a component of the Standard Method for calculating the prescribed capital amount for general insurers and Level 2 insurance groups (Objectives and key requirements text).

• Components of the charge: the charge is the sum of ORCI and ORCNI (para 7). ORCI targets inwards reinsurance business and is computed using a 2 per cent factor; ORCNI targets other business and uses a 3 per cent factor (paras 9-10). The multiplicative factors are explicit policy choices embedded in the Standard.

• Written premium revenue measures: GP1 and GP0 are defined as written premium revenue (gross of reinsurance) for the 12‑month period ending on the reporting date and the prior 12 months respectively (para 8(a)-(b)). Written premium revenue for this Standard includes state and territory levies, revenue from portfolio transfers and revenue relating to unclosed business (para 8(c)). The Standard thus makes explicit that certain items commonly treated separately in accounting or tax reporting are included in the premium base for prudential capital measurement.

• Insurance liabilities measure: NL is the central estimate of insurance liabilities net of reinsurance, determined in accordance with Prudential Standard GPS 340 Insurance Liability Valuation (para 8(d)). The footnote clarifies that a Level 2 insurance group which uses accounting entries to determine its premium liabilities under GPS 340 must use the accounting equivalent of net premiums liabilities for the Operational Risk Charge in place of the net central estimate.

• Volatility adjustment term: both ORCI and ORCNI include an additive term equal to the positive part (starting at zero) of |GP1-GP0| minus 0.2×GP0. This term operates as a buffer for changes in premium size or structure by effectively ignoring small year‑to‑year variations up to 20 per cent of GP0 and capturing only the excess (paras 9-10).

• Consolidation for groups: for Level 2 insurance groups the Operational Risk Charge is calculated after consolidation of intra‑group exposures; where the requirement is expressed in respect of a Level 2 group it is imposed on the parent entity (para 7; Application and commencement, para 2).

• APRA discretion: APRA may adjust or exclude a specific requirement in relation to an individual regulated institution by written notice (para 11). Regulated institutions relying on prior APRA exemptions or exercises of discretion must proactively contact APRA (para 12).

These concepts are the building blocks that link a firm’s scale (written premiums), its liabilities (central estimate under GPS 340), and measured premium volatility into a single prudential capital figure. The Standard explicitly characterises the Board of directors as bearing ultimate responsibility for ensuring the adequacy and quality of capital relative to the scale, nature and complexity of the business and its risk profile (Objectives and key requirements text). The interaction with GPS 340 and Australian Accounting Standards is also a core design element: the Standard defers to GPS 340 for the liability measure and to accounting standards for recognition of transfers (para 8(d); para 8 final sentence; footnote).

GPS 118 applies to regulated institutions defined in the instrument. The initial determination text specifies that the instrument applies to all general insurers and authorised NOHCs, and to a subsidiary of a general insurer or authorised NOHC where that subsidiary is a parent entity of a Level 2 insurance group (instrument header). The Schedule’s Application and commencement section refines this and states that the Standard applies to each general insurer authorised under the Insurance Act 1973 and to Level 2 insurance groups as defined in GPS 001; where a requirement is made in respect of a Level 2 insurance group, that requirement is imposed on the parent entity of the Level 2 group (para 2).

In practice the categories covered are:

• Authorised general insurers: each general insurer authorised under the Act is within scope and must calculate and hold the Operational Risk Charge (Application and commencement, para 2(a); Operational Risk Charge, paras 5-6).

• Level 2 insurance groups: the Standard applies to Level 2 insurance groups, with obligations imposed on the parent entity of the Level 2 group (para 2(b); para 7 on consolidation).

• Authorised NOHCs and certain subsidiaries: the instrument header specifically lists authorised NOHCs and subsidiaries of general insurers or authorised NOHCs that are parent entities of Level 2 groups as parties to which the instrument applies, which is consistent with the Schedule’s approach of imposing group requirements on the parent entity (instrument header; para 2).

Who pays: regulated institutions carry the capital cost, in the sense that they must hold capital equal to the Operational Risk Charge as the minimum amount to be held against operational risks (Operational Risk Charge, para 6). The ultimate responsibility to ensure adequacy rests with the insurer’s or group’s Board of directors (Objectives and key requirements text).

Who decides: APRA sets the standard (Authority, para 1). APRA also retains a specific power under this Standard to adjust or exclude a requirement for an individual regulated institution by written notice (para 11). Regulated institutions wishing to rely on earlier APRA discretions must contact APRA (para 12).

Not in scope: the Standard is specific to the Standard Method for operational risk under GPS 118; it does not on its face address other capital requirements in the Standard Method or alternative advanced methods. It is limited to operational risk and the prescribed formulae for ORCI and ORCNI (paras 5-10). The Standard requires use of GPS 340 for NL and of Australian Accounting Standards for recognition of transfers, thereby linking the Standard’s application to those instruments (para 8(d); para 8 final sentence; footnote).

For Level 2 groups there is an additional operational impact: the charge is calculated after consolidation of intra‑group exposures which requires group‑level aggregation and elimination procedures to be in place for the premium and liabilities measures (para 7; para 2 on parent entity obligations). The footnote also creates a specific nexus for Level 2 groups that use accounting entries for premium liabilities under GPS 340 , those groups must use the accounting equivalent of net premiums liabilities when determining the Operational Risk Charge.

Duties imposed by the Standard

• Hold minimum capital for operational risk: a regulated institution must maintain the Operational Risk Charge as the minimum capital held against operational risk (Operational Risk Charge, paras 5-6). The Operational Risk Charge is a binding numeric requirement defined by the Standard’s formulae (paras 7-10).

• Calculate ORCI and ORCNI and sum them: the regulated institution must calculate both components, using GP1, GP0 and NL as defined, and aggregate them to determine the Operational Risk Charge (para 7; paras 9-10).

• Use GPS 340 for liability estimates: NL must be the central estimate of insurance liabilities net of reinsurance determined in accordance with GPS 340 Insurance Liability Valuation (para 8(d)). The footnote provides further instruction for Level 2 groups using accounting entries under GPS 340 (footnote).

• Include specified items in written premium revenue: when compiling GP1 and GP0, the regulated institution must include state and territory levies, revenue relating to portfolio transfers and revenue relating to unclosed business (para 8(c)). Written premium revenue is gross of reinsurance (para 8(a)-(b)).

• Consolidate for Level 2 groups: the Operational Risk Charge for a Level 2 insurance group must be calculated after consolidation of intra‑group exposures; where the Standard’s requirement is expressed in relation to a Level 2 group it is imposed on the parent entity (para 7; Application and commencement, para 2).

• Recognise transfers in line with Australian Accounting Standards: all transfers of insurance business made in accordance with the Act must be recognised in line with the corresponding requirements under Australian Accounting Standards (para 8 final sentence).

• Engage with APRA on prior discretions: a regulated institution must contact APRA if it intends to rely on a previous exemption or other exercise of discretion by APRA under an earlier version of this Standard (para 12).

Rights and discretionary relief

• APRA adjustment or exclusion: APRA may, by written notice, adjust or exclude a specific requirement in this Standard in relation to a regulated institution (para 11). This is a right in the sense that a regulated institution may seek that relief; it is a power exercised by APRA, not an entitlement.

• Reliance on prior APRA decisions is conditional: regulated institutions do not have an unconditional right to rely on past discretions; they must contact APRA to place reliance on a previous exemption or exercise of discretion (para 12).

Board responsibilities and governance

• Ultimate responsibility at Board level: the Standard states that ultimate responsibility for prudent capital management rests with the Board of directors, and the Board must ensure the entity maintains an adequate level and quality of capital commensurate with the scale, nature and complexity of the business and risk profile, to meet obligations under a wide range of circumstances (Objectives and key requirements text). This is framed as a governance duty rather than a novel statutory power , the Standard allocates accountability for capital adequacy to the Board.

Procedural duties implicit in the measurement requirements

• Data and recordkeeping: to calculate GP1, GP0 and NL, institutions must assemble 24 months of written premium data and the central estimate of liabilities at the reporting date, including any adjustments required by GPS 340 and accounting recognition of transfers (paras 8(a)-(d); para 8 final sentence; footnote).

• Consolidation processes: Level 2 parent entities must have processes to consolidate intra‑group exposures for calculation of the charge (para 7).

The Standard does not itself specify prescriptive reporting timelines or enforcement mechanisms beyond APRA’s ability to issue written notices (para 11) and the general legal framework under section 32 of the Insurance Act 1973 (Authority, para 1). Any further supervisory action or sanctions would arise from APRA’s wider powers under the Act and other prudential standards, which are outside the text supplied.

The text of GPS 118 sets prudential requirements and confers limited administrative discretion on APRA but does not in itself specify civil or criminal penalties, monetary fines or detailed enforcement procedures within the Standard. The only enforcement‑adjacent powers and mechanisms stated in the Standard are:

• APRA may adjust or exclude a specific requirement by written notice: paragraph 11 gives APRA the power to modify application of the Standard for an individual regulated institution by notice in writing. That is an administrative discretion enabling case‑by‑case tailoring (para 11).

• Requirement to notify APRA when relying on previous discretions: paragraph 12 requires a regulated institution to contact APRA if it seeks to place reliance, for compliance with GPS 118, on a previous exemption or other exercise of discretion by APRA under a prior version of the Standard. This imposes an administrative obligation on regulated institutions to obtain APRA confirmation or direction before treating a prior discretion as continuing (para 12).

• Statutory basis: the Standard is made under section 32 of the Insurance Act 1973 (Authority, para 1) and, as an instrument under the Act, sits within the statutory prudential framework. The instrument header also records the delegate and date, and revokes the earlier Determination No. 7 of 2019 (instrument header). Any enforcement action, directions, or penalties APRA may take for non‑compliance would therefore arise under the Insurance Act and APRA’s statutory powers rather than through provisions set out in GPS 118 itself; those statutory enforcement mechanisms are not reproduced in this text.

What the Standard does not do, per the source

• It does not prescribe monetary fines, criminal offences or express civil penalties within its own text. The Standard defines capital requirements and the method to calculate the Operational Risk Charge, and records APRA’s discretion to adjust or exclude requirements by written notice, but does not list direct penalties for failing to hold the required capital.

• It does not detail procedural enforcement steps such as reporting timetables, notice periods for supervisory intervention or appeal processes for APRA decisions under para 11; those procedures would be governed by the Act and APRA’s broader supervisory framework rather than by GPS 118 itself.

Practical implication for enforcement risk

• Non‑compliance with the Standard creates supervisory exposure because APRA has discretion to tailor requirements and the Standard is part of a larger prudential regime; the Standard requires regulated institutions to maintain specified capital amounts and to engage with APRA on prior discretions (paras 5-6, 11-12). The Standard therefore imposes a compliance obligation that triggers APRA’s supervisory oversight, but the text supplied does not enumerate the range of sanctions APRA may use for breaches (beyond its express discretion to adjust or exclude).

• Regulated institutions should treat APRA’s written notice power under paragraph 11 as a channel for regulatory relief and as a potential enforcement lever in reverse: APRA can use notices both to grant relief and as a basis for requiring remedial action, but the Standard itself does not specify the latter’s form or consequences.

If a regulated institution requires a detailed mapping of enforcement powers or penalty matrices, that analysis must draw on the Insurance Act 1973 and APRA’s published enforcement policies and procedures, which are not included within this instrument.

GPS 118 is explicitly interconnected with several other legal and prudential instruments as set out in the text. The Standard does not operate in isolation; it requires inputs and recognition practices from other instruments and from accounting standards. The principal interactions indicated in the Standard are:

• Insurance Act 1973: The Standard is made under section 32 of the Act (Authority, para 1). The Act provides the statutory basis for the Prudential Standard and for APRA’s delegated powers to make and revoke prudential standards and determinations (instrument header and Authority). The Standard’s application to authorised general insurers and NOHCs derives from the licensing and regulatory architecture within the Act (instrument header; Application and commencement, para 2).

• GPS 340 Insurance Liability Valuation: NL, the liability measure used in the numerator of the Operational Risk Charge, is required to be the central estimate of insurance liabilities net of reinsurance determined in accordance with GPS 340 (para 8(d)). GPS 118 therefore depends on GPS 340 for a key input and defers to its valuation methods, adjustments and potential exceptions. For Level 2 insurance groups that use accounting entries to determine their premium liabilities under GPS 340, GPS 118 refers to the footnote: where accounting entries have been used, the Level 2 insurance group must use the accounting equivalent of net premiums liabilities instead of the net central estimate for the Operational Risk Charge (footnote).

• Australian Accounting Standards: the Standard mandates that all transfers of insurance business made in accordance with the Act must be recognised in line with the corresponding requirements under Australian Accounting Standards (para 8 final sentence). This imposes a direct link between the accounting recognition treatment and the premium and liability measures used for the Operational Risk Charge.

• Prudential Standard GPS 001 Definitions: GPS 118 uses defined terms such as Level 2 insurance group, parent entity and subsidiary as defined in GPS 001 (instrument header; Interpretation, para 4). That means GPS 118’s scope and the identity of the entity upon which requirements are imposed are determined by GPS 001’s definitions.

• Other prudential standards and the Standard Method: GPS 118 is described in its objectives as a component of the Standard Method for calculating the prescribed capital amount for general insurers and Level 2 insurance groups (Objectives and key requirements text). That places GPS 118 as one element of a broader capital framework that includes other capital charges and methodology standards.

Operational and compliance intersections

• Data and valuation alignment: because GPS 118 requires GP1/GP0 and NL measures that are defined with reference to accounting and GPS 340, a regulated institution must ensure consistency between the data and valuation bases used for statutory accounting, for GPS 340 liability valuation and for the Operational Risk Charge. Any divergence in recognition, timing or measurement under accounting standards and GPS 340 can affect GPS 118 outcomes (para 8 and footnote).

• Group consolidation rules: for Level 2 insurance groups the charge is calculated after consolidation of intra‑group exposures (para 7). That requires group‑level consolidation rules and intra‑group elimination processes conforming with GPS 001 definitions and group‑level accounting standards.

Regulatory discretion and prior decisions

• APRA’s written notices under para 11 create an interface where GPS 118 can be altered for an entity-by-entity basis, potentially changing how GPS 118 interacts with other standards in specific cases. Paragraph 12 requires institutions to contact APRA regarding prior discretions, indicating that historical interactions between GPS 118 and other instruments are not automatically continuous and require APRA re‑engagement.

What the text does not cover

• The Standard does not reference other specific statutes, tax rules, or foreign regulatory standards; nor does it incorporate APRA’s enforcement rules or the complete Standard Method text. Any practical interaction with the broader regulatory system , reporting obligations under other prudential standards, or supervisory escalation under the Act , must be inferred only through the statutory context; such detail is not contained within this instrument.

In short, GPS 118 is tightly coupled with GPS 340 for liabilities, with Australian Accounting Standards for recognition of transfers, with GPS 001 for definitional scope and with the overarching Insurance Act 1973 for legal authority and APRA’s supervisory framework.

The instrument itself records a limited amendment history. Key points from the source are:

• Revocation of prior Determination: The delegate of APRA revoked Insurance (prudential standard) determination No. 7 of 2019, including Prudential Standard GPS 118 Capital Adequacy: Operational Risk Charge made under that Determination, at the point of issuing this instrument (instrument header). The text therefore expressly replaces the prior iteration of GPS 118 contained in Determination No. 7 of 2019.

• New Determination date and commencement: The new Prudential Standard GPS 118 is determined in the form set out in the Schedule and is dated 24 May 2023 (instrument header). It commences on 1 July 2023 (instrument header; Application and commencement, para 3).

• No further amendments recorded in the source: the version supplied contains no later amendments, no amending determinations, and no legislative changes to GPS 118 beyond the revocation of the prior Determination No. 7 of 2019 and the making of the new Determination No. 8 of 2023. The Schedule presents the operative text of GPS 118 as at the commencement date.

• Transitional or grandfathering provisions: the Standard contains a discrete transitional administrative provision in paragraph 12 that requires a regulated institution to contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion made by APRA under a previous version of this Standard (para 12). That paragraph functions as a safeguard against automatic continuation of prior discretions without APRA confirmation.

Implications for amendment tracing

• To determine earlier textual differences, one must compare this Schedule with Determination No. 7 of 2019. The instrument records only that the prior Determination is revoked; it does not provide a redline or list of specific textual changes between the versions. The only explicit historical action given in the text is the revocation and replacement.

• Any subsequent amendments or delegations after the date on the instrument would not be captured in the supplied text. For a complete amendment timeline beyond what is recorded here (revocation of No. 7 of 2019, determination dated 24 May 2023, commencement 1 July 2023), a practitioner must consult APRA records, the Federal Register of Legislation or later determinations.

The text supplied contains no litigation history, case references, judicial decisions, or administrative tribunal decisions. It does not name any legal proceedings or court interpretations of GPS 118. The only legal references in the instrument are to statutory provisions (section 32 of the Insurance Act 1973 in the Authority paragraph) and to other prudential standards (GPS 001 and GPS 340) and Australian Accounting Standards. There are no cases cited in the Standard, and paragraphs 11 and 12 refer only to APRA's administrative discretion and the requirement to contact APRA in relation to prior discretions; they do not reference any judicial review processes or reported decisions.

Consequently, within the boundaries of this source:

• There is no recorded litigation that interprets or challenges the formulae for ORCI or ORCNI, the definitions of GP1/GP0 or NL, APRA’s discretion under paragraph 11, or the transitional instruction in paragraph 12.

• If a practitioner requires information on how courts or tribunals have treated GPS 118, APRA discretions under the Insurance Act, or disputes about capital adequacy calculations, such material will have to be sourced from case law databases and regulatory enforcement records external to the provided text.

This absence of litigation references in the Standard itself is not evidence of absence of disputes in practice; it is a reflection of the fact that the instrument, as published, does not contain or cite legal decisions.

The Standard contains several features and drafting choices that create specific practical traps and implementation risks. These are concrete technical and administrative issues drawn from the text:

• Gross-of-reinsurance premium basis: GP1 and GP0 are written premium revenue gross of reinsurance (para 8(a)-(b)). Insurers that maintain internal reporting on a net basis must ensure they can reproduce gross premium measures for GPS 118. Failing to calculate GP1/GP0 gross of reinsurance will understate the premium base and the Operational Risk Charge.

• Inclusion of levies, portfolio transfers and unclosed business: written premium revenue for GPS 118 explicitly includes state and territory levies, revenue relating to portfolio transfers and revenue relating to unclosed business (para 8(c)). Practitioners who omit levies or treat portfolio transfers inconsistently with accounting recognition can produce an incorrect GP1/GP0. The Standard separately requires transfers of insurance business to be recognised in line with Australian Accounting Standards (para 8 final sentence), so the accounting treatment of portfolio transfers directly affects the premium base.

• Absolute growth term and 20 per cent deadband: the additive volatility term uses the positive part of |GP1-GP0| minus 0.2×GP0 (paras 9-10). This means year‑to‑year changes in written premium up to 20 per cent of GP0 are ignored, but any absolute change above that triggers inclusion of the excess. Two practical issues arise: (a) the Standard uses absolute value, so both large increases and decreases in written premiums can increase the charge, and (b) the base for the 20 per cent threshold is GP0, the prior year's gross written premium. Firms with significant business discontinuities, run‑offs, or portfolio acquisitions must therefore model both directions of change.

• Different percentage multipliers for reinsurance vs other business: ORCI uses 2 per cent while ORCNI uses 3 per cent (paras 9-10). Entities must properly segregate inwards reinsurance business from other business. Misclassification of business lines could materially misstate the charge.

• Dependence on GPS 340 and accounting methods: NL must be determined in accordance with GPS 340 (para 8(d)). The footnote further requires that where a Level 2 group uses accounting entries to determine its premiums liabilities under GPS 340, it must use the accounting equivalent of net premiums liabilities for GPS 118. This introduces potential mismatches if GPS 340 valuation conventions differ from accounting measurement frameworks; practitioners must reconcile and document the basis used.

• Consolidation requirement for Level 2 groups: the Operational Risk Charge for Level 2 insurance groups is to be calculated after consolidation of intra‑group exposures (para 7). That requires consistent intra‑group elimination of premiums and liabilities, and raises questions about the treatment of intra‑group reinsurance and internal service charges.

• Recognition of transfers under Australian Accounting Standards: transfers of insurance business must be recognised in line with the corresponding requirements of Australian Accounting Standards (para 8 final sentence). Different accounting treatments for business transfers (e.g. portfolio transfers, scheme transfers, novations) can produce different GP1, GP0 and NL outcomes; practitioners must ensure the accounting treatment aligns with the prudential measurement.

• APRA discretion and regulatory uncertainty: paragraph 11 allows APRA to adjust or exclude a specific requirement in relation to a regulated institution by written notice. That creates a permissible pathway to tailored relief but also a source of regulatory heterogeneity. Paragraph 12 requires institutions to contact APRA to rely on prior discretions. Firms that assume prior exemptions continue to apply without APRA confirmation risk non‑compliance.

• Board accountability for capital adequacy: the Standard explicitly places ultimate responsibility with the Board to ensure capital adequacy commensurate with the business’s scale, nature and complexity (Objectives and key requirements text). Boards must therefore satisfy themselves not only that the numeric Operational Risk Charge is calculated correctly but that the overall capital strategy (quality and quantity) addresses the firm’s operational risk profile.

• No express enforcement penalties in the text: GPS 118 does not set out enforcement sanctions; it must be read alongside the Insurance Act and APRA’s enforcement approach. Practitioners should avoid assuming the Standard itself prescribes particular penalties.

• Timing and reporting alignment: GP1 and GP0 are measured for the 12 months ending on the reporting date and the 12 months ending 12 months prior (para 8(a)-(b)). If reporting dates differ across entities in a group, consolidation requires aligned cut‑offs to ensure consistent GP1/GP0 and NL measures.

• Portfolio transfers and recognition timing: the Standard requires transfers to be recognised in line with accounting standards and includes portfolio transfer revenue in written premiums (para 8(c) and final sentence). The timing of recognition under accounting standards may create volatility in GP1 and in the volatility term; practitioners must reconcile timing differences.

These are concrete procedural and measurement "gotchas" that flow from the Standard’s definitions and formulae. The common sources of implementation error are classification of business, accounting recognition of transfers, choice of liability measurement (GPS 340 vs accounting equivalents), consolidation mechanics, and assumptions about continuity of prior APRA discretions.

Compliance under GPS 118 requires operationalising the measurement definitions, embedding processes to produce GP1, GP0 and NL, ensuring appropriate governance and documentation, and engaging with APRA where required. Below are practical steps aligned to the Standard’s text (cited paragraphs where relevant).

1. Identify whether GPS 118 applies

• Confirm whether the entity is an authorised general insurer, authorised NOHC, or a parent entity of a Level 2 insurance group (instrument header; Application and commencement, para 2). If the entity is part of a Level 2 insurance group, confirm whether the obligation is to be discharged by the parent entity.

2. Establish governance and Board oversight

• The Board must accept ultimate responsibility for the adequacy and quality of capital against operational risks and ensure capital is commensurate with scale, nature and complexity (Objectives and key requirements text). Ensure Board minutes, capital policies, and risk appetite statements explicitly reference the Operational Risk Charge and its role in overall capital strategy.

3. Data collection and definitions

• Compile written premium revenue for the 24‑month window required: GP1 is written premium for the 12 months ending on the reporting date; GP0 is the 12 months ending 12 months prior (para 8(a)-(b)). Ensure the revenue figures are gross of reinsurance.

• Include specified items: capture state and territory levies, portfolio transfer revenue and revenue relating to unclosed business in GP1 and GP0 as required (para 8(c)).

• Validate accounting recognition of transfers: ensure all transfers of insurance business are accounted for in line with Australian Accounting Standards, and reflect that recognition consistently in the GP series (para 8 final sentence).

4. Liability measure

• Compute NL as the central estimate of insurance liabilities net of reinsurance in accordance with GPS 340 (para 8(d)). If operating as a Level 2 insurance group that uses accounting entries to determine premium liabilities under GPS 340, determine the accounting equivalent of net premiums liabilities and use that figure for GPS 118 as the footnote requires.

5. Segregate inwards reinsurance business

• Identify and segregate inwards reinsurance business to calculate ORCI distinct from ORCNI. Ensure that the classification of written premiums between inwards reinsurance and other business is documented and reconciled.

6. Apply the formulae

• Calculate ORCI and ORCNI per paragraphs 9 and 10:
  • For ORCI use the 2 per cent multiplier applied to the greater of GP1 and NL plus the positive part of |GP1-GP0| − 0.2×GP0 (para 9).
  • For ORCNI use the 3 per cent multiplier on the same base and volatility adjustment (para 10).
• Aggregate the two components to produce the total Operational Risk Charge (para 7).

7. Group consolidation (Level 2)

• For Level 2 insurance groups, prepare consolidated GP1, GP0 and NL figures after elimination of intra‑group exposures, per paragraph 7. Document consolidation rules and intra‑group eliminations to produce a traceable calculation at the parent entity level as required in para 2.

8. Documentation and audit trail

• Retain evidentiary support for GP1, GP0 and NL: premium schedules, ledger extracts, accounting entries for transfers, GPS 340 valuation reports, and consolidation workings. Ensure internal and external auditors can reconcile the Operational Risk Charge to primary records.

9. Engage APRA where necessary

• If the institution has an existing APRA exemption or other exercise of discretion under a previous version of GPS 118, contact APRA to confirm reliance (para 12). If the institution seeks an adjustment or exclusion of a specific requirement, prepare a written submission to APRA and be prepared to receive a written notice if APRA grants relief (para 11).

10. Stress testing and scenario analysis

• Given the volatility term in the formula, run scenarios for large premium increases and decreases and for portfolio transfer events to understand impacts on the charge. Model the annual effect of different recognition timings for portfolio transfers and levies.

11. Controls and periodic recalculation

• Implement controls to ensure the Operational Risk Charge is recalculated at each reporting date, with sign‑offs by responsible finance, actuarial and risk function personnel, and Board review as part of capital adequacy reporting.

12. Reconcile with overall capital framework

• Treat the Operational Risk Charge as the minimum capital for operational risk and reconcile it with the entity’s broader prescribed capital amount under the Standard Method (Objectives and key requirements text). Ensure capital quality (Tier composition) and capital planning consider the charge’s inclusion.

13. Address special cases

• If the entity uses accounting entries under GPS 340 for net premiums liabilities, document the accounting equivalent used for NL and ensure consistency with the GPS 340 footing (footnote). For portfolio transfers, ensure that the accounting recognition date and prudential recognition date align or are reconciled in the calculation.

14. Monitoring APRA communications and updates

• Monitor APRA guidance, notices and future amendments to GPS 118 or GPS 340 that may change measurement bases, consolidation approaches or APRA’s interpretation of transfer recognition.

By following these steps and documenting the bases and assumptions used for GP1, GP0 and NL, a regulated institution will align its processes to the Standard’s measurement and governance expectations. The Standard’s explicit references to GPS 340 and Australian Accounting Standards mean compliance requires coordinated work across actuarial, finance, accounting and risk functions, and proactive engagement with APRA where historical discretions or tailored relief are involved (paras 8(d), 8 final sentence, 11-12).